MEGAUPLOAD founder Kim Dotcom has accused New Zealand police of selectively applying the law after they opted not to prosecute intelligence officials who illegally spied on him.

Police reviewed the actions of the Government Communications Security Bureau (GCSB) after it was revealed last year that the agency unlawfully spied on Dotcom before his arrest for alleged online piracy in January 2012.

They said yesterday that the investigation had found GCSB staff illegally intercepted an unspecified communication from Dotcom in breach of the Crimes Act.

However, police said they would not prosecute because they could not prove there was a deliberate intent by the intelligence officers to break the law.

Dotcom dismissed the argument and said he never intended for copyright material to be exchanged on his Megaupload file-sharing site but he was still facing charges of online piracy.

"One law for them, another for us,'' he tweeted. "Where was my 'criminal intent' when some Megaupload users shared copyright infringing material?''

He said he was not surprised at the police's refusal to prosecute.

"This decision smells like conflict of interest and cover-up,'' he told TVNZ.

"I didn't expect anything but a whitewash. It's the police investigating the police.''

Dotcom is a German national but has New Zealand residency, meaning he should have been off-limits to the GCSB under laws banning the agency from spying on locals.

Prime Minister John Key last year acknowledged the spy agency had overstepped its limits and issued a public apology to Dotcom, who is free on bail and fighting extradition to the United States.

Key also introduced legislation allowing the GCSB to spy on residents and citizens for the first time, which passed through parliament earlier this month.

He said that the police investigation showed the GCSB had made a simple mistake that did not warrant prosecution.

The opposition Labour Party said the decision raised doubts over whether government agencies would be held to account if they breached surveillance laws.

"How can the public have confidence their privacy will be respected if there are no consequences when the GCSB breaks the law?'' deputy leader Grant Robertson said.

The US Justice Department and FBI allege Dotcom's Megaupload sites netted more than $US175 million ($195 million) in criminal proceeds and cost copyright owners more than $US500 million by offering pirated copies of movies, TV shows and other content.

Dotcom, who plans to sue the police and GCSB for damages, argues that Megaupload simply offered a data storage service and was not responsible for content that users placed there.

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